Switzerland's New Efforts to Prevent the Abuse of Bankruptcy Proceedings
On 1 January 2025 new regulations entered into force in Switzerland to prevent the abuse of bankruptcy proceedings by certain persons to circumvent financial obligations to the detriment of their creditors and the Swiss social security insurance.
Objective of the new regulations
The main objective of the new regulations is to address situations in which certain persons are using bankruptcy proceedings in order to obtain an unfair advantage over their competitors and avoid their financial obligations. The typical scheme that the new regulations try to weed out is that a person controlling a company is allowing on purpose such company to go bankrupt, only to incorporate immediately thereafter a new company, which is then hiring most of the old company's workforce and acquiring – typically at a low price – assets from the bankrupt company. Such scheme not only causes significant damage to the bankrupt company's creditors, but also to the Swiss social security insurance system, as the Swiss state unemployment insurance will have to partially pay the unpaid salaries of the employees of the bankrupt company, and, in addition, distorts competition. Furthermore, the new regulations also seek to restrain the sale of factually liquidated and overindebted companies, which are used by the new owners for incurring additional debt until bankruptcy proceedings are opened with respect to such companies.
To tackle such abuse, the new regulations consist of the following five main measures:
Improvement of the criminal prohibition to carry out professional activities;
Introduction of the possibility to search for individuals in the Swiss Central Business Name Index;
Enforcement of public law claims by way of bankruptcy proceedings;
Abolition of the retroactive opting-out;
Nullity of sale of shell companies.
Criminal prohibition to carry out professional activities
Already before the new regulations were implemented, the Swiss criminal code provided the criminal courts with the possibility to prohibit a person from carrying out a specific professional activity for a certain period, if such person committed a criminal offence (e.g., mismanagement or fraudulent bankruptcy) while carrying out such professional activity, and if there was a danger of repetition by such person.
So far, such prohibition mainly applied to activities performed by such person independently or for a company as a member of a corporate body (i.e., as board member). The new regulations now extend the possibility for such prohibition, enabling the court to prohibit such person also from acting for a company in any function which requires registration with the commercial register. For as long as such a prohibition is in place, the affected person cannot carry out an activity for a company as an officer, as manager of a branch office, or having signing authority inscribed in the commercial register.
In addition, the enforcement of such prohibitions, which have been imposed by the criminal courts, has been enhanced by the introduction of a new obligation of the Federal Registry of Commerce to verify and to report detected violations of such prohibitions. Finally, a new duty of the bankruptcy officials to report any criminal offences, of which they become aware, has also been introduced, the aim being to increase the prosecution of fraudulent bankruptcies and thus the number of persons eventually sanctioned with a prohibition to carry out such activities.
Possibility to search for individuals
Another measure, which will be newly introduced by the new regulations, is the possibility to search for individuals online: The Swiss Central Business Name Index, which is available online, will provide for a new possibility to search for individuals and thereby obtain information on all such individuals' current and past positions in companies which have been registered with a commercial register in Switzerland.
On the one hand, this new search possibility – and the possibility to thereby detect behavioral patterns relating to the involvement in bankruptcies – should have a deterrent effect. In addition, the new search possibility will also allow criminal authorities to have more information in order to decide whether to impose a prohibition to carry out a commercial activity.
Enforcement of public law claims by way of bankruptcy proceedings
As a general rule, if a company does not pay a due liability, ultimately, bankruptcy is opened. As an exception to such rule, so far, claims against companies based on public law, such as tax claims or claims for social security contributions, could only be enforced by the respective public creditor (e.g., by the tax authority or the respective social security institution) by way of seizure of such a company's assets. Such "public creditors" did not have the right to request the opening of bankruptcy proceedings over companies if such companies did not pay their liabilities. The reason for such exception was twofold: On the one hand, this rule was established in favor of the debtors: a debtor should not have to expect bankruptcy proceedings to be initiated against it because of every (perhaps minor) tax or other public law liability. On the other hand, this rule was also designed to facilitate the enforcement of such public law claims: Not only did the public creditors not have to compete with private creditors in the context of bankruptcy proceedings, but in addition, and unlike in bankruptcy proceedings, the enforcement by way of seizure can be requested by a creditor without any advance payment of costs. In practice, however, this rule often led to the situation that the overindebted debtor did not pay its public creditors but its other creditors, thereby trying to avoid or at least delay the opening of bankruptcy proceedings. Because of this rule, already overindebted or insolvent companies could continue to participate in the economy, thereby distorting competition and harming its existent (as well as new) creditors, until a private creditor asked for the opening of bankruptcy proceedings.
Under the new regulations, this exception has been abolished: Public law claims which are not paid by the debtor in the context of a debt enforcement cannot be enforced anymore by way of seizure of assets, but the public creditors will have to enforce their claims, like private creditors, by requesting the opening of bankruptcy proceedings over the debtor. It is expected that this change will result in a shorter lifespan of overindebted or insolvent companies, and reduce the damage created by such companies by continuing to operate and accumulate debt.
Abolition of retroactive opting-out
Under Swiss corporate law, larger companies must have their annual accounts audited in an ordinary audit. Smaller companies, which in at least one of the previous two business years did not exceed two out of the three thresholds of a balance sheet amount of 20 million Swiss Francs, sales revenue of 40 million Swiss Francs, and 250 FTEs on annual average, are not required to perform an ordinary audit but only need to submit their annual accounts to a limited audit (Review) - except in case they are listed, have bonds outstanding or are required to prepare consolidated accounts. Companies which are not required to perform an ordinary but only a limited audit and which do not have more than 10 FTEs on an annual average, can even waive the limited audit (Review) with the consent of all their shareholders (so-called opting-out).
Before the implementation of the new regulations, it was possible to opt out not only for the future but also retroactively: If the waiver was declared within six months of the close of the financial year (and before the annual accounts of such last financial year were approved by the annual general meeting), then such waiver applied not only to the annual accounts of the current financial year (as well as of the future financial years) but also retroactively to the accounts of such last financial year.
The possibility of a retroactive opting out was sometimes abused: In case the auditors raised issues in the context of their audit of the annual accounts of the last financial year, such as irregularities in the book-keeping or concerns regarding going-concern/overindebtedness of the company, some companies opted out from the limited audit (Review), thereby ending such audit and avoiding further scrutiny by their auditors or consequences thereof.
To prevent such abuse, under the new regulations, an opting-out is only possible for the future financial years and not for the annual accounts of the current and the last financial year. Furthermore, the opting-out declaration will need to be filed with the commercial register before the beginning of the financial year from which on such opting out shall apply.
While the abolition of the retroactive opting-out will help to prevent the abuse of the opting-out rules, such abolition will also render impossible the so far legitimate use of the retroactive opting-out in the context of certain solvent restructurings, such as e.g., group-internal mergers, to avoid unnecessary costs and delays due to the audit requirement.
In addition to the abolition of the retroactive opting-out, a new obligation of the tax authorities has been introduced to inform the competent commercial register in case a company does not submit its annual accounts within the required deadline, as this may be an indication that accounts are not correctly maintained and the requirements for an opting-out may thus not be fulfilled anymore. In case such a company is subject to an opting-out, the commercial register will require the company to either renew its opting-out declaration or alternatively elect an auditor.
Nullity of sale of shell companies
According to the jurisprudence of the Federal Supreme Court, the sale of shares in a shell company is null and void. Shell companies are companies which have ceased their business activities, have liquidated their assets, and typically have no economic substance anymore, but have not formally been dissolved and are still registered with the commercial register. The sale of such a company is considered by the Federal Supreme Court as a circumvention of the formal legal requirements regarding the liquidation and foundation of a company and, therefore, as being null and void. Notwithstanding such established and longstanding jurisprudence of the Federal Supreme Court, the sale of shell companies still happens in practice, as it allows the seller and the buyer to save time, money (and sometimes taxes) by not complying with the legal rules regarding the liquidation of the old and the foundation of a new company.
Apart from the sale of shell companies purely for the purposes of saving time and money, another related scheme has also surfaced: In case a company is nearly insolvent or overindebted, the owner depletes the company of its remaining assets and sells the depleted and overindebted company to a new owner. Upon acquisition, the new owner transfers the registered seat, and changes the name of the company and uses the company to make purchases, knowing that the company will never be able to pay and will soon be declared bankrupt, thereby harming the (existing and new) creditors.
The new regulations try to address the second type of trading of shell companies, by declaring share transfers to be null and void if the transferred company no longer operates as a business, has no disposable assets, and is overindebted. In deviation of the jurisprudence of the Federal Supreme Court, the new regulations require, therefore, not only that the company has ceased its business activities (and liquidated its disposable assets), but also that the company is overindebted. However, given that the legislator explicitly mentioned that the jurisprudence of the Federal Supreme Court should not be affected by the new regulations, it is to be assumed that also the sale of a not overindebted shell company continues to be null and void.
The new regulations also provide that if the commercial register reasonably suspects, in connection with a registration request, that an over-indebted shell company is transferred (e.g., combined change of seat and change of name depending on circumstances) it has to request the company to submit its current, signed, and, if the company has an auditor, audited annual accounts. If the company fails to submit the requested annual accounts, or if the submitted annual accounts confirm the suspicion of the commercial register, then the commercial register will refuse the requested registration and request the company to prove that no deletion of the company is necessary, i.e., that the over-indebtedness has been eliminated and that the company has resumed business activities.
Unfortunately, some of the commercial register offices have decided to not only make such information requests in case of founded suspicion, but announced, that whenever they are aware of a transfer of 100% of shares, particularly in case of limited liability companies who have to register such transfer in the commercial register, they will always require (audited) annual accounts before registering the transfer. This may particularly inhibit and complicate share transfers for limited liability companies during the first quarter of their financial year, as such annual accounts may not yet be available and is, in our view, an improper applying of the law by the respective commercial registers.
Conclusion
While the new regulations have a legitimate aim to curtail the abuse of bankruptcy proceedings, they, unfortunately, entail an increased administrative burden and also limit flexibility relating to legitimate retroactive opting outs for the large majority of companies. It will also have to be seen whether such measures will effectively reduce the abuse of bankruptcy proceedings.
Authors
Luca Jagmetti [email protected]
Thomas Rohde [email protected]
Christoph Neeracher [email protected]